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Executive Compensation April 2013

From time to time we find that DCAA has a “hot button” and we suddenly find that a number of clients are coming to advice on the same subject. Right now it seems to be executive compensation. FAR 31.206-6 governs compensation.

In general compensation for personal services is an allowable cost, but as usual there are restrictions. Compensation for work performed in the current year is allowable. The caveat is the compensation plan needs to be documented. Also, just because the compensation plan is written, doesn't mean it is allowable.

Also, owners of closely held corporations, LLC, partners, sole proprietors, owner’s family members, and contract employees whose contract is based on financial interest in the company are all subject to “special consideration.” A reasonableness test is performed on these individuals based on the IRS Code for compensation they receive that is NOT a distribution of profit (which is un-allowable). Contractors need to ensure they have a very strictly worded “Bonus Plan if they intend paying bonuses, if they don’t, bonuses will be denied as an allowable cost.

(The Excel spreadsheets provided by DCAA and filed electronically are named I.C.E. schedules. Short for Incurred Cost Electronically).February 2013Cost Reimbursable contracts (Cost Plus Fixed Fee, Cost Plus Award Fee, Cost Sharing, and similar Grants and Cooperative Agreements) carry unique reporting requirements, most importantly the submission of a Statement of Incurred Costs for each fiscal year of contract performance. DCAA requires this Statement of Incurred Costs be submitted electronically using its ICE (Incurred Cost Electronic) format.

Understanding this submission and the level of detail for job costing can place an administrative burden on most companies.

Furthering this burden, DCAA has fallen behind on the Incurred Cost audits that are used to determine Final Indirect Cost Rates SOME TIMES AS FAR AS SIX YEARS! We are working with more than one client right now who are trying to get their 2006 ICE schedules finalized.

Under DCAA internal procedure, it is inadvisable to have contractor Incurred Cost Submissions outstanding going back more than TWO years. DCAA will be undertaking a push to clear up outstanding Incurred Cost Submissions.

ARE YOU READY??

This delay in audit is usually not addressed in the Allowable Cost and Payment clause of contacts.

This means contractors cannot recover their final payment on contracts until DCAA has caught up on its audits and agreed to Final Indirect and Direct Costs for the years outstanding.

Some suggestions to minimize this problem include:

Get submissions into DCAA as soon as you possibly can. This will at least get you “in the queue”.

Be aggressive about putting pressure on both DCAA and the Contracting Officer to make the audit a priority.

Get provisional rate proposals and agreements in place as soon as possible.

Remain as realistic as possible when forecasting the provisional rates knowing it may take years for DCAA to complete the audit and finalize them. Do not understate these rates. Understating these rates is in essence an interest free loan that you are offering the government.

It doesn’t end there. DCAA Incurred Cost Audits are not just math-checking the submissions. DCAA may perform substantive testing, review policies and procedures, test time-cards and labor distributions, and pull expense vouchers for allow-ability, essentially performing an accounting system audit while they are there.Lastly, adequate and precise Incurred Cost submissions are typically used to forecast indirect rates for the coming year and establish the Agreement of Provisional Billing Rates.

IF PROVISIONAL BILLING RATES ARE NOT ADEQUATELY ESTABLISHED IT CAN result in significant under or over-payment on the contracts and leave companies with a liability to the government or a shortfall in funding for their costs. Neither are particularly reassuring situations.